Insights 
VT 
US stocks have decreased following reports of potential new tariffs. The Dow industrial average dropped by 0.55%, the S&P index by 0.18%, and the Russell 2000 by 0.64%. The NASDAQ index rose by 0.16%.
For the trading week, the Dow decreased by 0.30%, the S&P increased by 0.43%, the NASDAQ rose by 1.30%, and the Russell 2000 saw an increase of 0.19%. Despite recent drops, the S&P and NASDAQ recently closed at record levels.
Us Debt Market
In the US debt market, yields are down for the day. The two-year yield stands at 3.862%, down by 5.44 basis points. The five-year yield is at 3.946%, declining by 5.9 basis points. The 10-year yield is at 4.419%, down 4.3 basis points, while the 30-year yield is at 4.990%, down by 2.3 basis points.
Throughout the trading week, yields have mostly decreased. The two-year yield dropped by 3.0 basis points and the five-year by 3.2 basis points. The 10-year yield remained the same, whereas the 30-year yield increased by 3.5 basis points. The Fed funds interest rate anticipates cuts of less than 50 basis points by year’s end.
We believe the report regarding potential tariffs from the former president signals a period of heightened market uncertainty, which is a key ingredient for derivative strategies. The CBOE Volatility Index (VIX), often called the market’s “fear gauge,” recently jumped over 7% on similar trade-related news, indicating we should be positioned for wider price swings. Historically, the 2018-2019 trade disputes caused sustained volatility, and we anticipate a similar environment could return.
Given the market’s initial negative reaction, we see value in purchasing protective put options on broad market indices like the SPDR S&P 500 ETF (SPY). This strategy provides a direct hedge against a potential downturn spurred by escalating trade rhetoric. The notable drop in the Russell 2000 suggests that even domestically focused smaller companies are not seen as immune.
Sector Vulnerability
The specific mention of a 25% tariff on autos makes that sector particularly vulnerable, so we are considering bearish positions there. One could buy put options on automakers with significant European supply chains or on an ETF like the First Trust Nasdaq Transportation ETF (FTXR). According to the European Automobile Manufacturers’ Association, the EU exported over 1.2 million cars to the U.S. in 2023, showing how impactful this policy could be.
In contrast, the resilience in the technology-heavy NASDAQ suggests it may be a relative safe haven from direct European trade conflict. We could construct pairs trades, such as buying call options on the Invesco QQQ Trust while simultaneously buying puts on the industrials-focused SPDR ETF (XLI). This isolates the potential outperformance of tech against sectors more exposed to the tariffs.
We interpret the sharp drop in bond yields, especially on the two-year note, as a flight to safety and a bet that the Federal Reserve would have to react to an economic slowdown. If trade frictions escalate, the market will quickly price in more aggressive rate cuts than the less than 50 basis points currently expected. Therefore, we view long positions in Treasury futures or call options on bond ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) as a prudent play on this possibility.
